We initiate coverage on Vedant Fashions (VFL) with a Reduce rating and DCF-based FV of Rs 1,000. VFL is uniquely positioned to benefit from rising spends on branded apparel. Further, we like its high gross margins, asset-light franchise-driven model and strong brand connect with customers. We forecast healthy revenue/EBITDA/PAT CAGR of 21%/20%/ 20% over FY2022-25E, steady return ratios and FCF generation. Scale-up of newer brands will be instrumental in driving medium-term growth. At 57X FY2024E P/E, we find valuations full.

Largest Indian wedding and celebration wear player: VFL is best known for its range of Manyavar branded men’s wedding and celebration wear. Manyavar has steadily expanded its share of the men’s celebration wear market. Only 15-20% of the celebration wear market is currently organised; coupled with rising aspirations and spends on wedding wear, we believe the target opportunity for VFL is large.

Manyavar brand-led asset-light model with strong vendor and franchisee relationships: VFL operates an asset-light business model driven by franchisee-operated EBOs. It had 595 EBOs as of March 2022 covering 223 cities and towns in India as well as 12 international locations. VFL enjoys strong relationships with vendors (for jobbing, material procurement) as well as 300+ franchisees who invest in the EBOs. Manyavar is the flagship brand constituting 84.2% of sales in FY2021.

Forecast decent revenue/EBITDA/ PAT CAGR over FY2022-25E: We model healthy 21% and 20% revenue and PAT CAGR over FY2022-25E driven by steady SSSG of 7% (FY2024 onwards), higher EBO footprint, steady gross margins of 65-67% and growth in the e-commerce channel. VFL had healthy net cash balance of Rs 5.2 bn as of March 2022, which we forecast to go up to Rs 13.8 bn by March 2025.

We like the model and the opportunity but find valuations rich: We initiate coverage with a Reduce rating and a DCF-based FV of Rs 1,000. Our DCF bakes in healthy growth assumptions: FY2022-45E revenue CAGR of 15%, gradual EBIT margin expansion to 40%, WACC of 12.5% till FY2033 (lower WACC thereafter) and terminal growth rate of 5.5%. Lack of demand, inability to manage the franchise network, supply chain/vendor issues and inability to cope with evolving customer preferences are key risks.